Turkey Day

As Americans prepare to settle into their annual orgy of food and televised sport, financial markets are surprisingly (and irritatingly) volatile. The portfolio has suffered substantially over the past 24 hours, largely as a result of the continued resilience of Aussie equities. Whether this is the result of commodities, liquidity, or a good start to the Ashes, Macro Man is not sure. Nevertheless, the strong performance of the ASX while the S&P 500 remains stuck in the mud has proven to be relatively costly.

It leads Macro Man to once again question the themes that are driving markets. It is difficult to find a grand unified theory, given the cross market price action that has emerged over the past few days. Consider the following:

* Bonds are bid, with 10 years displaying a 70 bp inversion to Fed Funds. Macro Man continues to believe that official and pension flows are the primary driver of higher bond prices, but surely at some point (10 y yields < 4.50%?) one has to suggest that the market is pricing in a sever economic slwodown.

* The dollar is also reacting, trading to its lowest levels against the euro since the spring. The catalyst for yesterday's move was not terribly obvious. Some have suggested the White House downgrade to its 2007 growth forecast, but c'mon. Virtually every private sector forecaster in the world has downgraded its US growth forecast at some point in the last six months, and in any case, the WH forecast for next year still puts US activity around trend. This morning, another strong ifo survey provided a more obvious catalyst for euro strength. However, given the singular failure of the euro to react to the poor French data the other week, it is not obvious that relative growth is a key driver of currencies. Perhaps it is just down to CBs and models....

* 'Risky markets' such as Mexico, Brazil, and Turkey have underperformed dramtically. This morning has seen both the Turkish lira and domestic T Bills sell off hard; feel free to insert your own joke here about another Turkey getting roasted on Thanksgiving. Yet Asian markets and currencies have performed strongly. Is it a carry trade unwind? If so, why have currencies like the Aussie and New Zealnd dollars and sterling not suffered more? Is it because the CBs are buying those, too?

* And if growth, particularly US growth, is slowing, why haven't equities shown any signs of weakness? Is it because the stock market is smoking crack, or is it because the growth slowdown isn't actually the prevailing theme?

These are the issues that Macro Man is dealing with. If the growth slowdown theme catches fire, than the short equity bias should do well, and offset losses in bonds and commodity stocks. Moreover, Macro Man will be out of the legged EUR/USD short at 1.30, thus giving him some upside. Nevertheless, this isn't the first time that markets have displayed such inconsistencies. Two months ago, Macro Man wrote about the lack of thematic unity across markets. Curiously, not much has changed, except stocks and bonds are higher, while the dollar and oil or lower. Perhaps it just means that liquidity remains ample, while currencies and commodities are just range trading until the US re-accelerates. At this point, though, it's hard not to see the market taking a few more potshots at the dollar in particular....